Supply

u Meaning of supply u Law of supply u Determinants of supply u Supply Function

Supply Schedule and Supply Curve Supply schedule: A tabular depiction of the numerical relationship between the quantity supplied and its own price. Supply curve: A graphical representation of the relationship between the quantity supplied and its own price.

Supply schedule for chicken: Price/kg. Quantity supplied $ kg kg kg kg kg.

The Supply Curve Supply Curve Price Quantity Supplied per unit time

Supply Defined: : Relationship showing the various amounts of a commodity that producers would be willing and able to sell at possible alternative prices during a given time period, ceteris paribus.

Quantity Supplied Defined: Quantity Supplied: Total amount of a commodity that all firms are willing and able to sell, at a given price, during a given time period.

Law of Supply A change in the commodity's own price results in movement along the supply curve.  P : Qs Q s / u.t. Price S P0P0 P1P1 Q0Q0 Q1Q1 As price goes from P 0 to P 1, quantity supplied goes from Q 0 to Q 1

Change in Supply u Movement along the Supply curve: happens due to change in the price of the goods and resulting change in the quantity supplied at that price.

Change in Supply, cont. u Shifts in the Supply curve: This happens due to changes in factors of supply other than that of price of the goods.

Change in Supply u Factors affecting changes in supply: Changes in Factor Prices Changes in Technique Improvement in the Means of Transport Climatic Changes Political Changes Taxation Policy and government policy Goals of firms

The Determinants of Supply A. Commodity's own price: P  Qs  c.p. (Law of Supply)

B. Number of Firms in the Industry If the number of business firms producing a product increases, ceteris paribus, the supply curve shifts to the right.

Increased Business Firms Price S1S1 Q /u.t. At every price, quantity supplied is greater! S0S0

C. State of Technology Technological improvements allow a greater yield from a given set of factors. Therefore, it shifts the supply curve to the right.

Improved Technology: Price S1S1 At every price, quantity supplied is greater! S0S0

D. Weather If the weather is bad, the supply of agricultural commodities decreases. If the weather is good, the supply of agricultural commodities increases.

Good Weather Price S1S1 At every price, quantity supplied is greater! S0S0

Bad Weather Price S1S1 At every price, quantity supplied is less! S0S0

E. Changes in the Cost of Production This implies that the prices of the factors of production have increased, or decreased. Changes in technology may affect the quantity of the factors of production required, or the output derived from production factors, thus reducing cost as well.

Increased Production Costs Price S1S1 S0S0 At every price, quantity supplied is less! Supply curve shifts up vertically by the amount of the increased production cost.

What Occurs when COP Decreases? PriceS1S1 S0S0 At every price, quantity supplied is more! Supply curve shifts Down vertically by the amount of the decreased production cost.

F. Price of other commodities 1. Assume that a farmer has 100 ha of land on which he can grow corn or soybeans. 2. Assume the farmer will plant the one crop that yields the greatest expected profit.

3. Assume that on March 1, the E(profit) from corn is a greater than the E(profit) from soybeans. What would you expect our farmer to do? What would the market expect our farmer to do?

Expect Supply of Corn to....? PriceS1S1 S0S0 Expect supply of corn to increase in response to greater expected profits

Expect Price of Corn to......? PriceS1S1 D S0S0 P0P0 P1P1 We would expect corn prices to decrease in response to increased production, c.p.

Let think 4. A crop failure in Thailand due to extended drought is announced on April 1, that doubles the price of soybeans. How would you expect many farmers to respond to this news?

Domestic Supply of Corn? Domestic Price of Corn? PriceS0S0 D S1S1 P1P1 P0P0 Shift resources out of corn production in response to a decrease in expected relative profits

Domestic Supply of Beans? Domestic Price of Beans? PriceS1S1 D S0S0 P0P0 P1P1 Shift resources into bean production in response to an increase in expected relative profits

Do You See Other Strategies? 1. Stay with corn in anticipation of higher prices at harvest due to reduced corn acreage (decreased supply) 2. Go with beans, but hedge in the futures market to protect yourself from lower harvest prices due to increased soybean acreage (increased supply)

G. Producer Expectations If producers expect the price of a commodity he is able to produce to increase, supply of that commodity may increase.

PriceS1S1 D S0S0 P0P0 P1P1 Supply increases based on the producer’s expectation of a price increase BUT, prices in fact decrease due to increased supplies

Producer Expectations If producers expect the price of a commodity he is able to produce to decrease, supply of that commodity may decrease.

PriceS0S0 D S1S1 P1P1 P0P0 Supply decreases based on the producer’s expectation of a price decrease BUT, prices in fact increase due to decreased supplies

H. Length of Time Available for Producer Response to Price Changes Affects the slope of the supply curve Supply very short run Price Q/u.t. Not very responsive to price changes at all (Perfectly inelastic)

Length of Time Available for Producer Response to Price Changes Example: It is August 1st and corn price increases 50%. What supply response do farmers have at this point in the growing season?

Length of Time Available for Producer Response to Price Changes Supply short run Price Q/u.t. P1P1 P0P0 Q0Q0 Q1Q1 As the amount of time producers have to respond to price changes, the more elastic supply becomes

Length of Time Available for Producer Response to Price Changes Supply Long run Price Q/u.t. P1P1 P0P0 Q0Q0 Q1Q1

I. Production Taxes and Subsidies u Increase in tax will increase the total cost, thereby decreasing the supply. u Similarly a subsidy might incentivize the producer to supply more of that goods in order to maximize his profits. u Tax and subsidy are two important tools used by central government to control supplies of certain goods. u For example an increase in tax can be used to reduce the supply of cigarettes, while increase in subsidy can be used to increase the supply of fertilizers

An Increase in Production Taxes Price Q/u.t. S0S0 S1S1 Results in a decrease in supply. What happens to prices to consumers?

A Decrease in Production Taxes Price Results in an increase in supply. What happens to prices to consumers? S1S1 S0S0 Q/u.t.

Increase Subsidies Price Results in an increase in supply. What happens to prices to consumers? S1S1 S0S0 Q/u.t.

Decrease Subsidies Price Q/u.t. S0S0 S1S1 Results in a decrease in supply. What happens to prices to consumers?

Supply Function Qs = f( P, Prg, S… ) where; P = price; Prg = price of related goods; and S = number of producers.